Overall, before the rights-cum-public offer, the deal involves fresh issue of 41.5 crore shares, most of it at Rs 4 per share.

The rights-cum-public offer will involve the issue of another 16.5 crore shares if the shares are issued at Rs 4 per share. Cumulatively, the share capital will expand from Rs 15.247 crore to nearly Rs 70 crore. In other words, the claims of the existing shareholders will decline sharply.

What they get

The decline in the shareholders claims is per se not bad. What they get in return is what counts. For the shareholders, the deal involves an:

At end-March 2003, the net worth of the bank was about Rs 20 crore. In addition, the bank had net non-performing assets of Rs 104 crore.

After the deal, the net worth of the bank, at above Rs 225 crore, will be far higher than the net non-performing assets of the bank.

Importantly, the net worth per share of the bank will rise from about Rs 1.30 per share at end-March 2003 to more than Rs 3 per share at end-March 2003. The capital adequacy will rise to 9 per cent, which is the minimum level required by the RBI.

The merger with the Bangalore branch of Bank Muscat will not lead to any significant improvement though. According to RBI statistics, Bank Muscat earned a paltry return on assets of 0.3 per cent in 2001-02.

Though the net non-performing assets ratio of 1.10 per cent and the capital adequacy ratio of nearly 28 per cent augur well, the size of operations is also not material to make a huge impact.

Bank Muscat generated interest income of Rs 23.71 crore in 2001-02 compared of Rs 371 crore earned by Centurion Bank in 2002-03. The merger will only add a smaller proportion of good assets to the NPA-ridden larger asset base of Centurion Bank.

Questions over value

The question, however, is if the deal has delivered value to the shareholders. The deal has primarily valued the existing assets of Centurion Bank at about Rs 61 crore.

This is arrived by multiplying the paid-up equity shares of about 15.25 crore by Rs 4, which is the price at which new shareholders are entering the bank.

This does appear to be extremely low given that the bank has 60 branches, 139 ATMs and a deposit base of Rs 2,800 crore, 70 per cent of which is retail.

However, neutralising this asset base is the presence of non-performing assets, which was five times higher than the net worth of the bank at end-March 2003.

Centurion Bank shareholders would have benefited more if the rights offer planned earlier had gone through. If that had happened, the bank's net worth would have been that much higher, and the entry of new shareholders could have been allowed at a much higher price. That is, the value that is now accruing to the new shareholders would have accrued to the existing shareholders.

However, under the circumstances where a rights issue was not possible, the deal has not dealt a harsh blow to Centurion Bank shareholders.

Over time, the entry of Sabre Capital Worldwide may even deliver benefits to the shareholders.

Over-valued

The Centurion Bank stock now trades at Rs 12.50, even when there is the strong likelihood of expansion in equity from 15.25 crore to 70 crore shares.

In addition, Sabre Capital Worldwide is to be offered 13.5 crore warrants optionally convertible into shares within 60 months from the date of issue.

With a total business (advances plus deposits) of about Rs 4150 crore, the market capitalisation can be reckoned as about Rs 875 crore, considering a paid-up equity of 70 crore shares.

In contrast, the stocks of other new private sector banks such as ING Vysya Bank and UTI Bank tradeg at relatively lower valuations.

The market capitalisation of the stock of ING Vysya Bank with business of Rs 12,500 crore is about Rs 1,000 crore; that of UTI Bank with business of above Rs 24,000 crore is just above Rs 1,500 crore level. Both these banks are more profitable than Centurion Bank.

Given this backdrop, the stock of Centurion Bank appears over-valued. The price of Rs 12.50 factors in more than the revival of Centurion Bank.

The price factors in the growth in business of Centurion Bank at a much faster pace compared to the industry.

It is too early to comment on whether this growth will materialise. In this backdrop, it would be better if shareholders pare exposures to the stock.

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